YNAB BLOG

The Secret to Debt Reduction

There’s been lots of debate about the best way to pay off your debt. You want to reduce your debt, so you embark on a journey to find the best way to do it. What you find is a bunch of people talking about all of these different approaches to lining up your debts before you begin killing the bloodsuckers off.

The agreed upon method is called the debt snowball by most. You pay your minimums on every debt. On the ‘first’ debt you pay any extra you can. Once the ‘first’ is paid off, it drops off the list and a new ‘first’ is born (a firstborn? no…). You take all of the money you were paying on the first first, and pay it on the second first (this includes the minimum and the extra). Once the second first is paid off, you have a new first, which is the third first, replacing the second first, and first first (twice removed). Your third first is now getting the first and second firsts’ minimums and the extra. Basically it’s getting first3 type treatment. Your third first is picking up steam. Not to be outdone, once your third first is paid off, you apply its extra, along with the first first and second first, to the fourth first. You repeat this process untili your last first is paid off.

Not only have you paid off your debt, you’ve also brought to pass a biblical prophesy:

“And the last shall be first, and the first shall be last.”

But I know you have a burning question inside. How do I know what the first first is? Well, that’s the debate I mentioned above. How do you order it so you’re out of debt as fast as possible?

Well, silly, of course you take the smallest balance and make it first. Wait – no. Take the highest rate as the first, with the lowest rate being the last to be first. Mathematically that makes perfect sense. Some people have a much more effective (read: complicated) method (whatever works for you works for you) to help them reduce their debt.

Oh, wait. I forgot another method:

This approach is based on the ratio of the outstanding balance to the minimum amount due. Divide the latter into the former, and concentrate your payments on the debt with the lowest resulting value.

The first first is determed by a ratio that gives you full guidance into the most effective debt reduction strategy.

Feel like declaring bankruptcy yet?

The YNAB plan for debt reduction:

(1) Make a plan.
(2) Follow the plan (see #1) with I N T E N S I T Y

If you don’t manage #2, it doesn’t matter how effective #1 is, you’ll never get anywhere.